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The coming Trump stagflation

The self-inflicted damage to Trump’s economy is deepening. Will he get away with it politically?

The BLS jobs report for August, released Friday, continues the July pattern that caused President Trump to abruptly fire the BLS director, Erika McEntarfer. The new director is not in place yet, so the August numbers are honest. If anything, they understate what’s coming.

Job creation has basically collapsed. Payroll employment increased by just 22,000 in August. Unemployment rose to 4.3 percent, the highest since October 2021. Yet labor force participation stayed high and quit rates were almost nonexistent, as anxious workers hung on to the jobs they had. September is expected to be even worse.

As Fed Chair Jay Powell pointed out in his August 22 speech to the annual Fed conference at Jackson Hole, Wyoming, the economy settled into an odd sort of equilibrium. He said, “Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

For the moment, the stock market likes what it sees. A slack labor market means discipline on wage costs. For now, corporate profits are holding up. Even Trump’s effort to oust Fed governor Lisa Cook did not spook the market.

But the likelihood is that the soft jobs numbers for August are just the first step toward a Trump stagflation. Having an economy reach an equilibrium well below its potential, as Powell describes, is exactly what happened during the Great Depression.

Here is the likely stagflation scenario: Inflation keeps creeping up as tariffs raise the costs of both producer inputs and consumer products, while corporate consolidation and the collapse of economic regulation and antitrust enforcement allows more price-gouging at the expense of consumers. As the Prospect has reported, severe price hikes are being extracted in electricity and in health care. We will get more details when the latest Consumer Price Index is released on Thursday.

Meanwhile, as the labor market shrinks, GDP growth slows and prices keep outstripping earnings. Trump’s intimidation of immigrant workers, his cuts in direct federal employment and jobs subsidized by federal grant support, in public services like Medicaid, and in infrastructure projects, keep weakening the job market.

The Fed can only do so much in these circumstances. A modest cut of a quarter-point is expected at next week’s meeting of the rate-setting Federal Open Market Committee on September 16–17. A bigger rate cut, pushed by Trump and his two allies on the Fed Board of Governors, would stimulate inflation.

The likelihood is that the air keeps coming out of the economic balloon, gradually and then suddenly, as both unemployment and inflation keep creeping up. At some point, investors head for the exits. As our friend Matt Stoller observes, a stock market bubble combined with a real estate bubble has been sustaining demand. When the bubble bursts, demand collapses.

Usually, a worsening economy spells political trouble for an incumbent president. You might think that Trump would be worried about all this, with a midterm election a little more than a year away. But Trump’s strategy is to scapegoat and blame others; and unless the Democrats have a more coherent narrative and strategy, he could get away with it.

By December, the economy could well look something like this: Unemployment well above 5 percent, inflation in excess of 4 percent, and the stock market far below its August peak. All this is the fruit of Trump’s perverse policies.

But for Trump, MAGA, Fox, and the amen chorus in Congress, it’s the fault of the Democrats for not rubber-stamping his latest budget cuts (let’s hope!), the Fed for failing to cut rates further, the BLS for not cooking the data, and foreign leaders for imposing some tariffs to counter Trump’s gratuitous trade war.

Could Trump sell that story? He’s adept at big lies, and his sycophants amplify them.

The Democrats, above all, need a consistent account of what’s occurring, a coherent strategy, and a lot more unity and nerve. They have reality on their side. It’s a start.

~ ROBERT KUTTNER

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